Are Contract Laborers Covered Under ESI When Total Workforce Is Below 20?

Hi All,

Could anyone please advise if employees covered under ESI include the contract laborers working with us, even if the total number employed through a contractor is less than 20? Please note that the total workforce with the contractor is also below 20.

Rolly

Hi,

In this case, you'll be the principal employer. If all the formalities have been completed as far as the Contract Act is concerned, your contractor is liable for ESI of his/her employees. Your company needs to save and maintain a file for half-yearly ESI returns of the contractor's employees.

Have a nice day!!!

Hi Shilpa,

Thank you for the reply. I am aware of the role of the principal employer. My question is, what if the contractor has fewer than 20 people working for him, making him not liable to contribute? In that case, if those workers are working under us on a contract basis, will they be eligible for ESI as our establishment is covered?

Rolly

Hi,

If the principal employer is covered by the act, it's mandatory for the contractor. Additionally, any work done under the heading of labor charges will attract ESIC. For example, even if an external carpenter worked for the company, they will also be covered for ESIC.

Pravin

Hi Pravin,

As per your reply, kindly elaborate on whose liability it will be to deposit ESI. Will it be the liability of the principal employer because the contractor has no ESI code as he has less than 20 people working for him, and they are working for us on a temporary basis?

Rolly

Hi,

I suppose your establishment is covered under ESI. In such a case, quite irrespective of the Contract Labour (R&A) Act or the concept of the "principal employer", you will be obliged to cover your contractors' employees even if the contractor deploys or employs less than 20 employees at your establishment. The above position is crystal clear from the definition of an "employee" provided at Sec. 2(9) of the ESI Act 1948. Your doubt will dissolve once you read this definition.

Regards,
Samvedan
May 7, 2007

Hi Samvedan,

I went through the definition and it says about temporary labours that - "iii. whose services are temporarily lent or let on hire to the principal employer by the person with whom the person whose services are so lent or let on hire has entered into a contract of service..."

So, it mentions a term contract of service. My query is what if the contractor himself has employed these people (less than 20) on a casual basis i.e. no contract of service, just a temporary basis, and if they are working for us, will we be liable to pay ESI for the number of days they have worked for us? If yes, then why? Please clarify.

Rolly

Thank you, samvedan. I will check it out.

If the establishment in which contract laborers are employed is under the purview of ESIC, then all contract employees drawing a salary of less than Rs. 10,000 are entitled to be covered under ESIC. If the contractor does not have their own ESIC code, then ESIC deductions may be made from the Principal employer's ESIC code.

Regards,
Wagh UA

Hi,

Before proceeding, you need to decide whether you are making things legal or not. If not, let them work without maintaining any records. If you decide to make things legal, you will have to pay their contribution based on the company's code. Additionally, any external person who worked in the company will be liable for ESIC, whether they have a code or not.

Hi Samvedan,

I went through the definition, and it says about temporary laborers that - "iii. whose services are temporarily lent or let on hire to the principal employer by the person with whom the person whose services are so lent or let on hire has entered into a contract of service..."

So, it mentions a term contract of service. My query is what if the contractor himself has employed these people (less than 20) on a casual basis, i.e., no contract of service, just a temporary basis, and if they are working for us, will we be liable to pay ESI for the number of days they have worked for us? If yes, then why? Please clarify...

Any contract labor deploying 20 or more individuals is liable to obtain a license, provided the principal employer issues Form V. This is a regulatory requirement.

Any employee paid Rs. 10,000/- or less, regardless of whether employed by the principal employer or a contract employer, must contribute to ESIC. This is a statutory requirement. Both parties are accountable and responsible for complying with this requirement.

Hi,

The last answer (from Mr. Shetty) is correct.

If you are a covered establishment, whether a factory or a Shops & Commercial Establishment, and you engage either a temporary coverable employee (i.e. in receipt of gross wages less than Rs. 10,000/- p.m.) or you receive a Contractor's coverable employee (i.e. in receipt of gross wages less than Rs. 10,000/- p.m.) even for a single day (in either of the cases), you will have to register and cover such an employee under ESI for certain.

If your Contractor is an independently registered establishment under the ESI act, he will have to comply with ESI formalities, satisfy you about proper compliance, indemnify you against actions you may face for lapses on his part and deposit the due contributions by himself in respect of his employees. However, if this is not the case and since you are a covered establishment (that is our original assumption), you will have to complete all ESI formalities and discharge all relevant obligations (as though the concerned employee was your employee anyway!) against your own code number and recover necessary amounts from your contractor.

I suppose the issue is now clear. I am sorry I could not respond earlier. I was out of town for a couple of days!

If you have more queries, welcome.

Regards,

Samvedan

May 9, 2007

Thank you, Samvedan, and others.

So, what I have understood is - even if we are employing a contractor who has fewer than 20 people in total, and thus does not have an ESI code, we will have to deposit the ESI for those employed laborers until the time they are with us, even though they are not otherwise covered by the contractor under ESI. Right?

Now, if you permit, may I clear one more doubt? We have another case coming up whereby an employee's basic salary is 10k, and thus his PF contribution is 1200 per month. Now, he asks us to deduct his PF at 6500 basic, and he is ready to give an undertaking for the same. Also, he is ready for the employer's contribution to be reduced, no issues.

My query is, can we do so? Because as per my knowledge, PF contribution once made cannot be reduced. However, another argument coming up is that since his basic is above 6500/-, we can go ahead. Please advise.

Rolly

Hi,

Contract Labour applies when the employee strength increases to 20, but ESIC is applicable when more than 9 employees are employed, which means you need to comply with ESIC.

For any further queries, you can write to me at [Login to view].

Regards,
Umesh

Hi again,

Regarding the PF issues, you only have to walk forward, not backward in labor laws. However, you can do so after getting the employee's declaration certified by the PF inspector. But who knows when this inspector gets transferred, and upon inspection, this may be troublesome for your organization. It's better not to reduce the basic to 6500 from 10000.

Regards,
Umesh Chaudhary

Hey, I think I need to make my point clear. We are not talking about reducing the basic amount but about reducing the PF contribution from 1200 to 780. The basic amount remains intact, and the employee is willing to provide an undertaking that he willingly desires his PF to be deducted based on a 6500 basic salary.

Rolly

Hi,

I understood your query and then I replied. Decreasing basic or decreasing PF contribution is not interchangeable; they are mutually exclusive. You cannot do both. I am 100% sure. If you attempt to do so and are caught later, you will need to pay arrears.

Thanks and regards,
Umesh
umesh.chaudhary@ril.com
welcomeumesh@yahoo.com

Hi,

I understood your query and then I replied. Decreasing basic or decreasing PF contribution is not interchangeable; they are mutually exclusive. You cannot do both simultaneously. I am 100% sure. If you attempt to do so and are caught later, you will need to pay arrears.

Furthermore, his salary is Rs. 1000.00, and ESIC is also applicable. Once you set his basic to 6500, the ESIC contribution will decrease as well.

Thanks and regards,

Umesh
Email: umesh.chaudhary@ril.com
Email: welcomeumesh@yahoo.com

Hi Umesh,

Thank you for the patience.

Well, I have seen many organizations restrict PF to 6500 irrespective of the fact that the basic keeps rising beyond that. The only requirement is mutual consent. So, if both parties, namely the employee and employer, agree, why can the contribution not be made at 6500/-? Because anybody with basic pay above 6500 is not entitled to PF compulsorily.

I hope I am clear.

Rolly

Hi everyone,

After going through the discussion, I would like to point out that there are two types of contributions: compulsory and voluntary. Any extra amount paid above the basic Rs. 6500 is considered voluntary contribution. Therefore, if an employee wishes to reduce their voluntary contribution and if the employer does not have any objections, they can proceed with the adjustment.

Regards,
Revathi

Hi Revathi,

So, you mean there will be no problem in reducing the contribution as even the employer's contribution will also get reduced proportionately.

Rolly

Hi,

If the principal employer is covered under ESI, then the contract employees will also be covered, even if the contractor has fewer than 20 employees. The principal employer has to deduct and remit in their (principal employer) code for contractor employees as well.

Regards,
G Sakthivel

I do not find any reason when the statutory limit is fixed at Rs. 6,500 for PF applicability, why can't we restrict ourselves for recovery and remittance of PF on Rs. 6,500, though earlier we have recovered and remitted on a higher amount than Rs. 6,500.

Hi Shilpa,

I have a question: If a person works for one day and meets an accident, what should be done in that situation?

Please explain to me at [Login to view] or call me at 9923396082.

Prashant Shinde.

Shilpa Verma is very accurate and clear. We are the principal employers. If contractors have not deposited ESI, then the principal employer is liable for that.

All responsibility rests with the Factory Manager or Occupier when any employee enters the factory premises.

In the case of construction work on-site, for example, if the project amount is one crore, 75% is allocated for material costs and the remaining 25% for labor costs. ESI will be deducted at a rate of 6.5% on the labor cost portion.

Thanks & regards,

Manoj

Hi Friends,

I think some of our friends are right that the principal employer must cover the ESI for contract employees as well and can recover that from the contractor in turn. When it comes to PF, I think it is not possible to reduce the contribution, and you might be required to pay the arrears later on. I would like to know if I am right in this case. Also, I would like to know what is the maximum PF that can be paid by the company if the basic is more than Rs 6500.

Looking forward to your replies.

Regards,
Amith R.

Hello Rolly,

The ESI responsibility of individuals employed through not just contractors but also subcontractors lies with the primary employer. I learned this recently from our legal advisors. He also gave me an example that I wish to share here.

Primary employer level - ABC Ltd. (Sells home appliances and produces its spare parts.)
Contractor Level - XYZ services (assembles spare parts manufactured by ABC at ABC and also at XYZ services and sends it back.)
Subcontract level - Housekeeping (XYZ hires laborers on contract for security and housekeeping)

Now ABC is responsible for ESI payment for:
1) All ABC employees whose wages are below 10k p.m.
2) For XYZ's Skilled laborers doing assembling work for ABC (wages < 10k p.m.)
3) For those who are working at ABC but on contract with XYZ - office boys, security guards, admin officers etc.

It can be claimed back from XYZ, but ABC would be held responsible if things go wrong.

As for PF, for employees whose basics are more than 6.5k p.m, a minimum of Rs. 780 contribution needs to be made towards EPF by the employee and by the company.

A company may choose to freeze employer contribution @ Rs. 780/- p.m. per employee, and the employee too may choose to keep it the same if the basic is Rs. 6.5k and above.

However, if the employee wishes to increase his/her contribution towards EPF, he/she may do so after expressing so in writing and post the respective EPF officer's approval. However, it does not imply that the employee too would be liable to contribute more than Rs. 780/-.

Seniors and Legal practitioners, please correct me if I am wrong.

Thank you

Hi Prashant,

If an employee meets with an accident on the date of his joining, he is entitled to compensation under the Workmen Compensation Act if he is not covered under ESI. For a violation of any statute by the Contractor, the principal employer will be squarely liable.

I shall send the latest judgment on ESI contributions payable for the outsourced job to your email ID.

Thanks & Regards,

Kalyan R
Manager - Personnel
WABCO-TVS (INDIA) Ltd
Mahindra World City
Chengalpattu - 603 002.
Mobile: 9840942232